Rob Arnott vs Jack Bogle on Fundamentally-Weighted Indexes

Two of my investing heroes are engaged in a bit of a battle over whether or not an investor should use so-called fundamentally-weighted indexes. It’s Rob Arnott, the father of the approach, versus Jack Bogle, a pioneer of the older way of indexing.

The “smart index” approach, which I like, is sometimes referred to as passive-plus but to Bogle it is still an active strategy in the end. To proponents of the fundamentally-weighted index, however, making the choice to hold market cap-weighted traditional indexes is active as well – it is a choice, in the end, to pursue a certain type of market exposure.

Nevertheless, this is today’s must-read, via Andrew Hallam at the Globe & Mail:

Is there a better way for investors to index their portfolios? A bitter fight is breaking out over just that question.

In one corner sits John Bogle, founder of the Vanguard Group. He believes that index funds should hold stocks in proportion to each stock’s market capitalization – the market value of all the company’s shares.

In the opposite corner sits Rob Arnott, who co-authored The Fundamental Index: A Better Way To Invest, with Jason Hsu and John West. They believe that indexes should ignore market caps and hold companies in proportion to each firm’s fundamentals – things like cash flow or book value.

The spat between Mr. Bogle and Mr. Arnott may sound like an academic debate, but the outcome could have a large effect on your portfolio results.

Continue reading:

Is it worth making the shift to fundamental indexes? (The Globe & Mail)